Jefferies Adds Third Lender in Latest MBS Warehouse Deal

Jefferies Group has added a third lender to its latest securitization of a mortgage warehouse facility.

Proceeds from the $300 million Station Place Securitization Trust 2017-1 will be used to purchase mortgages eligible for sale to Fannie Mae, Freddie Mac or Ginnie Mae from three lenders, one more than previous deals. The facility provides these lenders, presumably nonbanks, with funds to make more loans. And the loans in the warehouse facility are bundled and sold to agencies; credit will be freed up to purchase more loans from the lenders.

The facility matures in one year; at the end of that term, Jefferies is required to pay the aggregate repurchase price, which in turn will be used to pay off the notes in full and terminate the facility. If it fails to do so, the facility will "term out," becoming a static pool of mortgage loans whose collections will pay down the notes, according to Moody's Investors Service.

Moody's expects to assign an Aaa to the senior, $238 million tranche of notes to be issued.

The ratings agency expects losses of 1.8% in its base case, in which Jefferies Funding does not repay the notes and investors must rely on the credit performance of the remaining static pool of mortgages.

Among other changes from previous Station Place transactions, the frequency of the ongoing due diligence process will be reduced, to three times over the life of the transaction, according to Moody's. To mitigate the risks of reduced due diligence, a cash deposit and/or eligible mortgage loans will be placed in a margin account, depending on the aggregate number of exceptions found in the loans. No additional mortgage loans can be contributed to the facility if the total amount of level C and D exceptions exceed 25% of the due diligence sample pool.

Additionally, all loans will be subject to a 30-day aging restriction, compared to 60 days for either all or the majority of loans in the previous two Station Place securitizations.

Station Place Securitization Trust 2017-1 also has stronger collateral eligibility criteria when compared to the previous two deals, per Moody's. "For example, the eligibility criteria include a higher minimum FICO requirement (650 vs. 600 for the previous two deals)."

However, Station Place Securitization Trust 2017-1 may have higher concentration of manually underwritten agency conforming loans without agency approval numbers (up to 30%, compared to up to 15% in Station Place Securitization Trust 2016-3 and 0% in Station Place Securitization Trust 2016-1).

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